sexta-feira, 15 de janeiro de 2016

A welcome drop in the global price of crude oil

The financial markets’ downbeat, if not downright grisly, start to the year continued this week as stocks in several countries and the global oil price fell sharply.

That they are dropping together, though, does not mean they are sending the same signal. The evidence suggests that the slide in the oil price, this week dipping below $30 a barrel for the first time in more than a decade, reflects a welcome increase in supply rather than a worrying fall in demand.

While there are undoubtedly some losers from the fall in the price of crude, notably oil-exporting countries and banks exposed to the energy sector, the boost to real incomes in the rest of the world should outweigh them.

Given the focus on China at the moment, it is tempting to assume that the price falls in the financial and oil markets reflect serious concerns about weakening in the Chinese economy. This analysis is too simplistic. Although it is a big consumer of commodities, China buys only about a tenth of the global supply of crude.

There is not much sign of sharply slowing economic growth, and hence demand, from the US and Europe which between them make up around 40 per cent of worldwide oil consumption. A much more likely reason for falling prices has been the buoyancy of supply owing to US shale and also the decision by Saudi Arabia and other producers to keep pumping out crude rather than restricting output.

That may not be good for the prospects of reducing carbon emissions in the near term, but it is certainly of significant net benefit for the global economy and employment. Broadly speaking, a fall in the oil price transfers income from economies more likely to save it to those more likely to spend it, and from capital-intensive industries to ones that are labour intensive.

Certainly there are some risks. The beneficial effects of the fall in the oil price that began in 2014 seem to have been slower to come through than have the negative impacts. Given that inflation is very low in economies like the eurozone and Japan, there is always the chance that the one-off effect on consumer prices will feed through into inflation expectations, increasing the chance of a slide into the malign sort of deflation.

Overall, however, the boost to real incomes for most people and companies from cheaper oil is welcome.

The impact of lower oil prices on the financial sector, on the other hand, is considerably more negative. In theory, the hit to banks that have lent to energy producers should be offset by those lending to energy consumers. In practice, however, the concentrated nature of the former, through the threat of bankruptcy, may create an asymmetry which means the financial sector as a whole loses.

So be it. There is no reason that regulators should rush to help out banks which have exposed themselves unduly to a notorious volatile sector and taken a hit accordingly. Central bankers, though, need to keep a close eye on the functioning of the credit channel and the effect on inflation expectations. In this context, the US Federal Reserve’s decision to raise interest rates last month looks even more premature than it did at the time. At the very least, the Fed should signal that the next move is as likely to be down as it is up.

It says something about the uncertainties of the global economy and the threat of deflation that a fall in the oil price provokes fear as well as rejoicing. Undoubtedly there are downsides from violent swings in the price of a key commodity. But in the main, cheaper crude is a development to be welcomed.